Chinese Companies Going Out, And The New Patent Wars

For the past five years, the Chinese government has been encouraging Chinese companies to set up a foreign presence. In Chinese, this policy is known as 走出去 or “going out”. There are several reasons for this:

Chinese companies are predominantly low on the value chain, and are mainly in manufacturing. There is comparatively little value added, and the aim is to move them up the value chain, into design, sales, marketing and distribution where there are larger, more sustainable margins. This closely follows on what other Asian countries and companies have done.

The Chinese domestic market is brutally competitive, sales and distribution are complicated, and relationships (guanxi) are complicated. Provincial governments tend to favor their own manufacturers and brands, making it very difficult to go national in China, even for local Chinese companies.

Some consumer brands, influenced by the outstanding success of Apple, dream of making their own brand successful in overseas markets. The Chinese government has a love-hate relationship with Apple: they love the products and the Chinese manufacturing jobs it creates, but wouldn’t it be much better if a Chinese company could be like Apple?

If we look closer though, we find that Apple has several advantages which its competitors, including Samsung, just don’t have. These are:

A culture which revolves around product design. Under Steve Jobs and continuing under Tim Cook, one could argue that Apple is a design studio, which has hardware and software engineering and marketing, sales and distribution bolted onto it. All other companies are engineering-driven. Some, such as Microsoft, are trying to change to the Apple model. So far, Chinese companies don’t come close.

Since Apple is design-driven, its designers decree what features go into each iteration of its products. There is endless chatter between the design team and engineering about what component spec goes in and when it goes in, but the designers have the final say. This explains why there was such a short timespan between the third version of the iPad, launched in March 2012, and the fourth version, launched in October 2012.

If we take a closer look at the patent war being fought between Apple and Samsung, many of the patents which Apple is fighting over are design patents, which are notoriously difficult to defend. So far though, Apple has been faring well, and Samsung has been taking a beating.

Apple has a very simple product line. This means that Apple’s design, sales, marketing and distribution power are all focused behind just a few products. This is in contrast to its competitors, who take a shotgun approach, which gives their products less time to gain market traction and leave a lasting impression among consumers.

Apple’s design head is Jonathan Ive. Can you name Samsung’s? Or anybody else’s for that matter?

Chinese companies understand the importance of innovation and patents. The Chinese government appreciates this, but frequently takes a top-down heavy-handed approach, going so far as giving out quotas of how many patents every company must register each year. Chinese government ministries love quantitative measurements, but have no way to measure quality. Nevertheless, China became the top patent filer in the world in 2011.

So far, Chinese companies don’t have a clear patent strategy; for the most part they just focus on quantity and on leading-edge technologies such as telecom. If they are to build leading consumer brands, they will need to focus on patent acquisition, not just patent filings.

In the smartphone innovation wars, this is where Apple, Samsung, Google and Microsoft have focused their efforts. None of these leading players can innovate everything in-house, so they need to buy outside patent portfolios from Nortel and Kodak.

So far, no Chinese companies have participated in the smartphone patent wars; they aren’t high enough on the value chain. If Chinese companies are going to move up the value chain, they are going to have to acquire patents not just in China with their own engineering teams, but will also have to acquire them from overseas. In order to move up the chain effectively, they will need to have a smart strategy. Patent innovation number targets set by a Chinese government ministry just won’t work.

In the next article, I will take a look at the opportunities and challenges for non-Chinese patent holders who want to sell to the Chinese.